Is Enertork (KOSDAQ:019990) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Enertork Ltd. (KOSDAQ:019990) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Enertork

How Much Debt Does Enertork Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Enertork had ₩3.26b of debt, an increase on none, over one year. However, it does have ₩8.41b in cash offsetting this, leading to net cash of ₩5.15b.

How Strong Is Enertork's Balance Sheet?

The latest balance sheet data shows that Enertork had liabilities of ₩2.23b due within a year, and liabilities of ₩3.54b falling due after that. Offsetting this, it had ₩8.41b in cash and ₩5.93b in receivables that were due within 12 months. So it actually has ₩8.56b more liquid assets than total liabilities.

This surplus suggests that Enertork is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that Enertork has more cash than debt is arguably a good indication that it can manage its debt safely.

Although Enertork made a loss at the EBIT level, last year, it was also good to see that it generated ₩1.2b in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is Enertork's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Enertork has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last year, Enertork burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Enertork has net cash of ₩5.15b, as well as more liquid assets than liabilities. So we are not troubled with Enertork's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Enertork (1 can't be ignored) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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